We examine board quality and executive replacement decisions around deaths of senior executives. Stock-price reactions to executive deaths are positively related to board independence. Controlling for such factors as the deceased’s stockholdings, outside blockholdings, board size and whether the deceased was a founder, board independence is the most significant factor explaining abnormal returns. Board independence is particularly important when there is no apparent successor and firm performance is poor. The results are consistent with independent boards being reluctant to discipline poorly performing incumbent managers, but nevertheless using the opportunity of an executive death to improve the quality of management.

Keywords: Executive deaths, board composition, board size, corporate governance, managerial succession, CEO turnover, firm performance

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Market Reaction to Changes in the S&P SmallCap 600 Index

S. Gowri Shankar, James M. Miller

Firms added to (deleted from) the S&P 600 index experience a significant price increase (decrease) at announcement. Firms that newly enter (exit) the S&P universe experience a larger price increase (decrease) than firms that move between S&P indexes. Trading volumes are higher after the announcement and institutional ownership increases (decreases) following index additions (deletions). However, the price and volume effects are temporary and are fully reversed within 60 days, in contrast to the permanent effects reported for S&P 500 changes. Our results support the temporary price pressure hypothesis and are similar to results reported for Russell 2000 index changes.

Keywords: S&P SmallCap 600 index, Standard and Poor’s 600, stock-market index changes, index reconstitution, price pressure, institutional ownership

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Corporate Governance and Asset Sales: The Effect of Internal and External Control Mechanisms

Robert C. Hanson, Moon H. Song

We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying in-creases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets.

Keywords: Asset sales, divestitures, managerial ownership, board structure, insider trading

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Information Content of Business Methods Patents

Brian Boscaljon, Greg Filbeck, Tim Smaby

We examine the market reaction to business method patents granted to publicly-traded firms. Our findings suggest that the State Street decision represents a turning point not only for the growth in the number of business method patent filings, but also in the market’s awareness and perception of value creation for the filing firms. The granting of a business method patent evokes a positive average stock-price reaction, especially in the post-State Street period. Cross-sectional differences in abnormal returns depend on the type of patent granted. The market reaction also differs based on industry classification.

Keywords: business method patents, patents, patent quality, patent reform, business methods, market reaction, event study, State Street decision

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IPO Placement Risk and the Number of Co-Managers

Wallace N. Davidson III, Biao Xie, Weihong Xu

Previous studies show that co-managers mainly affect IPO aftermarket activities. We investigate the role of co-managers in IPO premarket activities. We argue that co-managers help reduce IPO placement risk and hypothesize that IPO issuers hire more co-managers when placement risk is higher. We find the number of co-managers is positively associated with three proxies for placement risk. IPOs with more price uncertainty and high-tech IPOs hire more co-managers, while IPOs in regulated industries hire fewer co-managers. We also find larger IPOs, recent IPOs, and IPOs with more reputable lead underwriters hire more co-managers.

Keywords: initial public offering, placement risk, co-manager, underwriter, pre-market, book building

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Effect of Governance Characteristics on the State of the Firm after an Initial Public Offering

Shelly W. Howton

I examine firm characteristics available to investors at a firm’s initial public offering date to determine whether they predict the firm’s survival, acquisition, or failure. Firms survive more often than they are acquired when they are venture-backed, the chief executive officer is the original founder and an outside blockholder is present. The presence of an outside director does not increase the probability of survival. Firms that are more likely to survive than fail include large firms and those with longer board tenure.

Keywords: initial public offering, corporate governance

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Institutional Ownership and Return Reversals Following Short-term Return Consistency

Boyce D. Watkins

Securities with consistently strong positive (negative) returns during the previous two weeks have future returns that are higher (lower) than those that do not. The results hold for various robustness checks, including those involving firm size, share turnover, past return levels, and bid-ask bounce. The returns to short horizon consistency trading strategies are reliable through time and are both economically and statistically significant. There is also some evidence that longer periods of consistency lead to greater risk-adjusted profits. Most surprising is that this effect holds only for those firms with high institutional ownership.

Keywords: consistency, asset pricing, institutional investing, market efficiency

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Erratum: Noninterest Income and Financial Performance at U.S. Commercial Banks

Robert DeYoung and Tara Rice

Table 7 (page 123) in our article is incorrect. The corrected table appears in the erratum, along with corrected text (page 123) and several necessary corrections to the summary statistics in Table 2 (pages 115-116). The corrections do not materially alter our findings or our conclusions.

Full text of erratum

Original article: DeYoung, Robert and Tara Rice, 2004. Noninterest Income and Financial Performance at U.S. Commercial Banks, The Financial Review 39, 101-127. Full text of original article (requires subscription or article purchase)

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The Financial Review

Abstracts of Volume 41, Number 3, August 2006

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